Period     1Q13/3M13

Actual vs. Expectations    According to  Oil World data, palm oil production in  Seremban Engineering’s (“SEB”) 1Q13 net profit of RM1.5m came in broadly in line, accounting for 19.5% of our FY13 estimate of RM7.9m.   

We expect a stronger performance in the coming quarters on the back of a higher percentage of projects to be completed.

Dividends    SEB has declared a NDPS of 2sen (2011: NDPS of 2sen) which is within our FY13 expectation.

Key Results Highlights    QoQ, the 1Q13 revenue was down by 11.9% to RM20.5m compared to RM23.3m in 4Q12 due to a decrease in both its domestic (-19.7%) and international (-5.8%) sales as there was a shorter working period in 1Q13 on the back of the Chinese New Year holiday. This affected the percentage of completion in its projects. However, the group recorded a higher profit before tax of RM1.6m compared to 4Q12 of RM0.91m as there were lower operating expenses in the quarter. To recap, 4Q12’s operating expenses were higher due to a one-off provision of specific debts.

YoY, the revenue and net profit were down by 3.6% and 24.5% to RM20.5m and RM1.5m respectively due to (1) lower recorded sales due to the shorter working period mentioned above; and (2) higher administrative expenses.

Outlook    Indonesia is estimated to enjoy an annual growth of 5.8% in 2013, which will be a booster to SEB’s FY13E revenue and earnings.

The company targets the commencement of its new fabrication operation facility in Lumut by end-13, which could be a further catalyst to FY14 earnings and raising its exposure to the oil and gas market. 

We continue to like SEB as its prospects remain positive on the back of increasing activities for its process equipment business and its diversification plan into the O&G sector.

Change to Forecasts    No change to our FY13-FY14E estimates given that the earnings were within expectations.

Rating     Maintain OUTPERFORM

Valuation     Maintaining our price target of RM0.78 based on an unchanged 6.5x FY14 PER.

Risks    Delays in projects execution or contracts award.

Source: Kenanga